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Thursday, June 9, 2011

COLD WAR: IRAN AND SAUDI ARABIA. BATTLEFIELD: OPEC

The Organization of Petroleum Exporting Countries (OPEC) has become the latest battlefield in the escalating cold war between Saudi Arabia and Iran, the 12-member cartel’s two largest producers.

The cold war, a fallout of mass anti-government protests sweeping the Middle East and Africa, already has stock markets heading south and could send oil prices soaring to $150 a barrel in the coming months, and fuel inflation in consumer nations.

Long-standing differences between Iran, a price hawk, and Saudi Arabia that has regularly engineered production levels that keep price hikes in check, came to head at this week’s OPEC gathering, the first in a decade that failed to end with agreement among the cartel’s members.

The escalating cold war between the two oil giants rendered OPEC incapable of meeting twin challenges: accounting for the turmoil racking the region and a weak global economy that needs increased oil supplies to drive recovery, but can’t afford spiraling prices.

Confidence among Asian refineries that Saudi Arabia would ensure that shortage in oil supplies would not occur was offset by concern that the Saudi-Iranian differences could paralyze the cartel for some time to come, given that turmoil in the region was likely to continue through the summer and, if anything, get uglier and bloodier.

The confidence that Saudi Arabia would ensure supplies and concern that the dispute was rendering OPEC impotent was reinforced by forthright remarks by Saudi Oil and Energy Resources Minister Ali Bin Ibrahim Al Naimi who, in a rare break with the cartel’s policy of presenting a unified front to the outside world, described this week’s policy-setting session as “one of the worst meetings we’ve ever had.”

Mr. Naimi made no bones about the fact that OPEC’s public face of unity was history and that the kingdom would sell more oil on its own if necessary.

Fears of an oil shortage stem from the disruption of oil production in Libya and Yemen, two countries where peaceful anti-government protests have turned violent and disrupted oil production.

Mr. Naimi’s comments contrasted starkly with efforts by OPEC Secretary General Abdullah Al Badri to downplay the political crisis gripping OPEC and portray the Saudi-Iranian differences as primarily economic.

Mr. Badri insisted that hard-line members of the cartel had objected to the cartel secretariat’s assessment that the global market would need 2 million barrels per day more oil for the third quarter of this year and 1.5 million the fourth quarter. Mr. Badri suggested that hardliners would welcome hikes of the price of oil that is currently already trading far above $100 a barrel to fund domestic spending.

Saudi Arabia and its oil-rich Gulf allies accuse Iran of instigating protests that have already toppled the presidents of Egypt and Tunisia, provoked brutal crackdowns and escalating violence in Libya, Syria and Yemen and could threaten the governments of others in the Middle East and North Africa.

Saudi concern about Iranian interference is fuelled by the fact that Shiite Muslim and Iranian assertiveness in the region has been on the rise ever since the last Gulf war that replaced the Sunni minority regime in Iraq of Saddam Hussein with Shiite majority rule.

Tension between Saudi Arabia and Iran heightened after Saudi troops entered Bahrain where a Sunni monarch was fending off predominantly Shiite protesters. Saudi Arabia has positioned itself as the leader of an Arab bloc determined to preserve the status quo in the region to the degree possible while Iran has championed the protests across the region except for in Syria, its closest Arab ally.

Within OPEC, Iran’s hard-line position and effective challenge of Saudi leadership was supported by Libya, Venezuela, Angola, Ecuador and Algeria, all nations that fear that increased production will drive oil prices down.

Those fears were reinforced by that fact that OPEC is already producing more than its official quota of nearly 25 million barrels a day. Saudi Arabia and Kuwait, the UAE and Qatar to a lesser degree are the only cartel members with the spare capacity needed to raise output to a daily 30.87 million barrels to meet OPEC’s demand projections.

The stakes for Saudi Arabia are high. This week’s OPEC failure to reach agreement could signal an Iranian intent to challenge the kingdom’s traditional leadership of the cartel. Iran may well have thrown down the gauntlet by refusing like in the past to ultimately accept Saudi influence on OPEC decision-making.

That would further complicate efforts by the United States and US and Europe to come to grips with the changing political map of the Middle East and North Africa who have traditionally relied on Saudi Arabia to moderate oil prices and are at odds with Iran over its human rights record, alleged fomenting of terrorist activities and suspicions that it is developing nuclear arms.

The cold war between Saudi Arabia and Iran is more than ever a global concern with its expansion into OPEC. A line has been crossed with Iran challenging the kingdom and the dispute playing out in public. OPEC, if it survives the battle between the two titans, is likely to never be the same again. It also suggests that the six-month old Arab popular revolt will ultimately leave little in the region unaffected, if not unchanged.

(James M. Dorsey, formerly of The Wall Street Journal, is a senior researcher at the National University of Singapore’s Middle East Institute and the author of the blog, The Turbulent World of Middle East Soccer